UK – Asset managers serving the pensions market should align their bond management products more closely with the liability needs of pension funds, urges consultants Hewitt Bacon & Woodrow.

"Bond portfolio managers must upgrade their services so that the bond portfolio is managed in a way that is more relevant to the liability needs of pension funds. Corporate bonds and other instruments such as swaps need to be considered regularly and actively as a way of managing risk," says Anthony Ashton, head of UK investment at Hewitt Bacon & Woodrow.

Concerns are that trustees are not using bonds for diversification purposes, but rather to harmonise assets with liabilities as they replace their decreased equity weightings. "Trustees see the risk against their liabilities as far more important than the risk against a benchmark and they require a more transparent approach to managing those risks. This requires different capabilities and practice," says Hewitt Bacon & Woodrow.

Says Ashton: "Much current practice is outdated, relying on bond indices that take no account of the duration and convexity of each fund's liabilities, and have no hope of creating the desired cashflows when required."

"Bonds can meet fund liabilities if managed appropriately and imaginatively. Managing a bond portfolio is at least as challenging as managing equities, but fund management groups have tended to under-invest in their bond-management operations," explains Martin Kraus, consultant at Hewitt Bacon & Woodrow.

The consultant is therefore urging fund managers to invest in their bond management operations to keep them flexible enough to provide the skills necessary to manage a large fixed income portfolio.





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